Measuring what matters – how businesses should prepare for sustainability reporting

Sam Smith, CEO of finnCap Group shares her thoughts with Business Leader regarding the importance of sustainability reporting for companies in all industries. 

Progress towards establishing a set of global sustainability standards has ramped up over the past 18 months. The International Financial Reporting Standards (IFRS) Foundation has proposed an International Sustainability Standards Board (ISSB), due to launch at COP26 in November. The new board will concentrate on sustainability-related financial disclosures, prioritising climate change.

Earlier this year, G7 leaders and central bank governors backed the ISSB and called for mandatory climate-related financial disclosures. This followed a landmark commitment by the UK government in November 2020 to mandate climate reporting by 2025.

The clear direction of travel is to give equal weight to financial and sustainability information in annual reports. Efforts are well underway to establish standardised ESG reporting, enhanced by the strong collaborative approach amongst the key standard setters and policymakers. The next stage of the journey towards more rigorous ESG measurement and disclosure will see businesses face profound shifts in corporate accounting and reporting requirements. Companies will be expected to deliver high-quality ESG disclosure, both for the benefit of external stakeholders and to support management decision-making.

Many of the world’s largest companies already recognise that ESG is integral to how they create value over the long term. They are also aware that the way in which information is disclosed could potentially impact how investment capital is channelled in future. But the spotlight is now turning towards SMEs. Whether speaking as investors, employees, consumers or other influencers, people are increasingly calling on SMEs to be transparent about their ESG credentials. I believe it is the bold and brave business leaders who will lead the way.

For smaller quoted companies, whilst it is not essential to have an ESG rating in place, they do need to ensure they have the minimum required levels of ESG disclosure in their publicly available materials.  This is crucial to enable investors to classify them in accordance with their sustainability standards internally and to comply with the new Sustainable Finance Disclosure Regulation (SFDR) which came into action in March 2021.

The complexity of existing ESG reporting frameworks and competing demands for data is understandably a significant barrier for SMEs with limited financial and human resources.

As a starting point – and to help reduce the burden – finnCap has created a simple ESG scorecard for companies based around 15 data points, 5 in each of E, S, and G. As far as possible, these data points are quantitative, unambiguous, easily obtained and – hopefully – meaningful. Growth companies can measure their ESG performance against key policies, standards and frameworks. You can download the finnCap ESG Scorecard via the form on https://www.finncap.com/esg. In addition, we have partnered with sustainability fintech leader World Wide Generation (WWG), to launch a digital sustainability reporting tool for SMEs.

Without robust ESG reporting, SMEs could find themselves at a distinct competitive disadvantage.  Many SMEs find themselves in sectors facing major technological and regulatory changes and needing to secure finance for transformation, whether in construction, agriculture, or energy, for example. To remain competitive and secure future financing, SMEs will need to invest in their own transformation. Harnessing these opportunities will also depend on SMEs’ ability to work with and provide the right ESG data.

The ability to access and leverage ESG information will be key for acquiring new customers, investment and avoiding legislative shocks.